When The Stock Market Drops (5 Things To Know)

February 16, 2017/

You’re trying to do everything right. You started saving in an investment account. You did some research and have a reasonable asset allocation. You stopped putting all of your 401(k) into your employer’s stock (...you did stop that, right?) and you’re starting to accumulate something significant. It feels good, until one day you hear the stock market is starting to sell off. The market keeps going down and your friends and co-workers are starting to talk about it. Perhaps the term "bear market" is being thrown around.

You start checking out financial media sites...every day. People start talking about the “trades” they’re making. How they are putting all of their 401(k) in cash. And let’s face it, you’re starting to get pretty nervous. You sign into your 401(k) and it’s down. A lot.

What you do next can have far reaching consequences.

Selling your stock investments when the stock market drops can set your savings back years. Protect your portfolio! I’m going to go through 5 things you can do to weather the storms that inevitably blow through financial markets every few years.

**Note: This article assumes you have a reasonable asset allocation based on your risk tolerance (how much up & down you can stomach), risk need (how much drama you have to deal with to reach your goals) and time horizon. This is not investment advice. Talk to your financial advisor.

Tip #1 Keep Buying & Don’t Look

No, seriously. Don’t look. It’s an unfortunate part of human psychology that we hate losing. We actually feel the pain of loss more than the joy of gain. Rather than fight this instinct, let’s acknowledge it and figure out how to work around it. When the stock market drops, just put your statements aside and commit to not signing in to view your account balances. In fact, if you are in your 30’s, 40’s or even 50's, a market downturn is typically a good buying opportunity. So keep buying into your diversified portfolio, even when that feels counter-intuitive.

Tip #2 Don’t Watch CNBC

Listen, financial “news” networks are not there to help you build wealth. They are there to sell advertising. They thrive on negativity and drama because it keeps people tuned into their show. Those shows with day-traders hopping around giving you “advice” on what to buy and what to sell? Turn them off. If you want to talk about your investments, call your financial planner.

Coincidentally, that brings me to Tip #3.

Tip #3 Call Your Financial Planner

Remember that person you hired to work with you to help you make your life plans a reality? They are ready to help you keep your plans on track. Helping clients make the right decisions when it comes to investing is one the key values a financial planner provides to clients. In fact, working with a financial planner who provides this kind of behavioral coaching can add 1.5% to your annual return over time. (Don’t take my word for it, check out this study from Vanguard.)

Your (real) financial adviser wants to talk to you. If you are stressed out you should always feel free to call them. I can't speak for other financial planners but my clients have unlimited access to me. I want to hear from them. Sometimes just talking through our worries and concerns helps us gain clarity on what our next steps should be.

Please don’t be embarrassed. It can be frightening when the stock market drops and we hear lots of negative news about recessions, job losses or other instability.

Tip #4 Avoid Market Magicians

Delete any newsletters you currently get from people peddling stock tips, options, precious metals, cryptos or any other secret market advice that only they (and their subscribers) know. The odds are high that they are either deluding themselves regarding their own ability or they are outright swindlers.

Tip #5 Be Sure You Have Cash On The Side

The hard truth about emergency savings account is that they are, essentially, insurance. You aren’t going to get rich by having 6 months in a savings account.

However, it may be what stands between you and financial disaster.

Let’s go back real quick to 2008-2009 - even in Richmond and Williamsburg, VA people were losing their jobs while the stock market was tanking. If you had to rely on your investments to cover living expenses during that time you would have experienced a serious setback on your path to financial freedom. You can read more about our personal story when it comes to emergency savings accounts here.

I sometimes speak with people who are using their portfolios as their emergency savings. They are trying to rapidly build wealth by investing as much money as possible into their investment accounts. This has become even more tempting over the last 9+ years when savings accounts have generally been paying 1% or less. I know I’m not excited about earning so little on my hard-earned savings. Having at least 3 months worth of living expenses in cash is crucial to your financial freedom. Three months is a bare minimum. I counsel clients to have closer to 6 months of cash on hand, more if you are in retirement or have uneven income.

Recap

Today we talked about avoiding two of the major wealth-killing mistakes people tend to make when the stock market drops:

Don’t sell your stocks during a downturn in the stock market.

Don’t use your investments as an emergency savings account.

And we also talked about ways to protect yourself:

Do control what you read and and listen to (no “business” news stations and no market “gurus”).

Do reach out to your trusted financial adviser to talk about your concerns and fears.

Do build your emergency savings account to create a financial foundation on which you can build your financial freedom.

What are your thoughts? Do you have any tips on how you got through 2008-2009?